Craig AC.
Optimal Income Taxation with Spillovers from Employer Learning [Job Market Paper]. Working Paper.
AbstractI study optimal income taxation when human capital investment is imperfectly observable by employers. In my model, Bayesian employer inference about worker productivity drives a wedge between the private and social returns to human capital investment by compressing the wage distribution. The resulting positive externality from worker investment implies lower optimal marginal tax rates, all else being equal. To quantify the significance of this externality for optimal taxation, I calibrate the model to match empirical moments from the United States, including new evidence on how the speed of employer learning about new labor market entrants varies over the worker productivity distribution. Taking into account the spillover from human capital investment introduced by employer inference reduces optimal marginal tax rates by 13 percentage points at around 100,000 dollars of income, with little change in the tails of the income distribution. The welfare gain from this adjustment is equivalent to raising every worker's consumption by one percent.
craig_jmp.pdf Craig AC, Roland G Fryer J.
Complementary Bias: A Model of Two-Sided Statistical Discrimination. Working Paper.
AbstractWe introduce a model of two-sided statistical discrimination in which worker and firm beliefs are complementary. Firms try to infer whether workers have made investments required for them to be productive, and simultaneously, workers try to deduce whether firms have made investments necessary for them to thrive. When multiple equilibria exist, group differences are sustained by both sides of the interaction – workers and firms. Strategic complementarity between the two sides complicates both empirical analysis designed to detect discrimination and policy meant to alleviate it. Affirmative action is much less effective than in traditional statistical discrimination models. More generally, we demonstrate the futility of policies that are designed to correct gender and racial disparities but do not address both sides of the coordination problem. We propose a two-sided version of "investment insurance" – a highly effective and potentially cheap policy in which the government (after observing a noisy version of the employer's signal) offers to hire any worker who it believes to be qualified and whom the employers do not offer a job. The paper concludes by proposing a way to identify statistical discrimination by employers when beliefs are complements.
twosided.pdf